Fitch Downgrades MassMutual’s IFS Rating to ‘AA+’; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded all long-term ratings on Massachusetts Mutual Life Insurance Company (MassMutual) and its wholly-owned insurance subsidiaries (see complete list below). Fitch has also revised the Rating Outlook to Stable from Negative.

The downgrade reflects earnings volatility and investment losses in recent periods that Fitch believes are not consistent with the prior rating levels. These concerns were the rationale for the prior Negative Outlook assigned in March 2009. In 2009, MassMutual's statutory net operating gain of $572 million was reduced to a net loss of $289 million after recognition of net realized capital losses. Over the past five years, MassMutual's statutory net income has ranged from a positive $703 million to a negative $993 million.

Fitch also notes the decline in MassMutual's quality of capital. While the absolute regulatory capital level increased 15% to $11 billion and the NAIC Risk-Based Capital ratio at 426% has held up reasonably well compared to peers, capital has benefited from a $750 million surplus note issuance and a $1.7 billion increase in the carrying value of asset management subsidiaries due to a change in U.S. GAAP treatment of noncontrolling interests.

The Stable Outlook reflects Fitch's view that MassMutual has financial flexibility to maintain strong levels of capital even under stressed scenarios. Fitch considers the participating nature of MassMutual's in-force whole life business as well as experience pass-through features of other insurance products as a significant source of financial flexibility. Fitch also recognizes that there is remaining hidden value in MassMutual's asset management businesses and real estate (albeit at reduced levels from previous years) not reflected in its regulatory capital.

The ratings and Outlook also consider MassMutual's solid and diversified operating earnings fundamentals, which have been more stable than net income. Although Fitch expects net investment income for MassMutual and the industry to be depressed due to the low interest rate environment and potentially less income from alternative investments, Fitch believes MassMutual's earnings will benefit from its strong whole life sales and sales force growth in 2008 and 2009, which were notable in a difficult environment. Fitch also recognizes that operating results are reflective of the company's comparatively high level of policyholder dividend payments.

Positively, Fitch notes that MassMutual's liquidity appears very sound with access to adequate sources of liquidity including but not limited to $750 million available in its commercial paper program and $2 billion in allowable advances from the Federal Home Loan Bank of Boston. MassMutual has no long-term financial debt due until 2023, and its funding agreement business appears substantially self-funding for several years given MassMutual's strong asset/liability management program. MassMutual's financial leverage and total financing commitments are relatively modest as measured by Fitch. Debt-to-total adjusted capital was 14% on Dec. 31, 2009.

Fitch would reassess the ratings of MassMutual should its earnings and capital remain volatile or come under significant pressure due to higher-than-expected credit related investment losses, particularly from its commercial real estate related holdings, which totaled 19.5% of invested assets (excluding policy loans).

The ratings on C.M. Life Insurance Company (CM Life) and MML Bay State Life Insurance Company (MML Bay State), which are wholly-owned subsidiaries of MassMutual, are based on certain commitments and guarantees made by MassMutual as well as Fitch's view that these entities are important operating companies within the MassMutual organization.

MassMutual Global Funding, LLC is a limited liability company domiciled in the Cayman Islands. MassMutual Global Funding II is a statutory trust domiciled in the state of Delaware. The companies and trusts were established for the sole purpose of issuing debt instruments secured by funding agreements issued by MassMutual.

MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company and its affiliates. MassMutual is headquartered in Springfield, MA. Its affiliates include OppenheimerFunds, Inc.; Babson Capital Management LLC; Baring Asset Management Limited; Cornerstone Real Estate Advisers LLC; MML Investors Services, Inc., MassMutual International LLC and The MassMutual Trust Company, FSB. The company has $420 billion in assets under management as of Dec. 31, 2009.

Fitch has downgraded the following ratings for MassMutual with a Stable Outlook:

Massachusetts Mutual Life Insurance Company

-- Insurer Financial Strength (IFS) to 'AA+' from 'AAA';
-- Issuer Default Rating (IDR) to 'AA' from 'AA+';
-- $250 million 7.625% surplus notes due Nov. 15, 2023 to 'AA-' from 'AA';
-- $100 million 7.5% surplus notes due March 1, 2024 to 'AA-' from 'AA';
-- $250 million 5.625% surplus notes due May 15, 2033 to 'AA-' from 'AA';
-- $750 million 8.875% surplus notes due June 1, 2039 to 'AA-' from 'AA'.

C.M. Life Insurance Company

MML Bay State Life Insurance Company

-- IFS to 'AA+' from 'AAA'.

MassMutual Global Funding, LLC

MassMutual Global Funding II

-- Secured notes program to 'AA+' from 'AAA'.

Fitch has affirmed the following ratings for MassMutual:

Massachusetts Mutual Life Insurance Company

-- Short-term IDR at 'F1+';
-- Commercial paper program 'F1+'.

Applicable criteria, 'Insurance Rating Methodology', dated Dec. 29, 2009, 'Life Insurance Ratings Criteria (Global)', dated March 24, 2010, and 'Fitch's Approach to Rating Insurance Groups', dated March 24, 2010 are available on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Brian Bertsch, +1-212-908-0549 (New York)
[email protected]
Lauren Kalinowski, CPA, +1-212-908-0524 (New York)
Julie A. Burke, CPA, CFA, +1-312-368-3158 (Chicago)

Source: Fitch Ratings